Nvidia (NVDA -1.41%) posted its latest earnings report on Aug. 23. For the second quarter of fiscal 2024, which ended on July 30, the chipmaker's revenue soared 101% year over year to $13.51 billion and beat analysts' estimates by $2.43 billion. Its adjusted EPS soared 429% to $2.70 and easily cleared the consensus forecast by $0.61.
Those headline numbers were impressive, but does Nvidia's stock still have room to run after rallying more than 220% since the beginning of the year? Let's review four reasons to buy Nvidia -- as well as one reason to sell it -- to decide.
Nvidia CEO Jensen Huang. Image source: Nvidia.
1. The AI market lit a fire under its data center business
Nvidia's sales of data center chips accounted for 76% of its top line in the second quarter, compared with just 57% of its sales a year ago. Its data center revenue surged 171% year over year during the quarter, accelerating from its 14% growth in the first quarter and 11% growth in the fourth quarter of fiscal 2023.
That explosive growth was driven by the rapid expansion of the AI market. Nvidia's top-tier GPUs are used to process complex AI tasks at data centers, and all of the top "generative AI" platforms -- including OpenAI's ChatGPT -- run on its chips. The generative AI market could still grow at a compound annual growth rate (CAGR) of 34% from 2023 to 2032, according to Allied Market Research, as more companies deploy those services to streamline, automate, and accelerate their businesses.
Nvidia doesn't face any meaningful competitors in the data center GPU market yet, so the AI land grab should continue to drive the breakneck growth of its data center business. During its latest conference call, CFO Colette Kress said Nvidia was still seeing "tremendous demand" for its "accelerated computing and AI platforms" and that it will ramp up its supply of those products in "each quarter through next year" to satisfy the market's demand.
2. Its gaming business is growing again
Nvidia is also the world's top producer of discrete GPUs for PC gaming. That business, which accounted for 18% of its top line in the second quarter, suffered a post-pandemic slowdown as the PC and gaming markets cooled off. The collapse of the cryptocurrency market exacerbated that pain as disillusioned miners flooded the market with used GPUs.
However, Nvidia's gaming revenue rose 22% year over year in the second quarter and finally ended its four-quarter streak of revenue declines. It also marked the segment's third consecutive quarter of sequential growth.
Nvidia attributed its recovery to its robust sales of its GeForce RTX 40 series GPUs for laptops and desktops, as well as the stronger growth of the gaming laptop market during the back-to-school season. Furthermore, Nvidia's share of the discrete GPU market rose from 75% to 84% between the first quarters of calendar 2023 and 2024, according to JPR. AMD's share dropped from 24% to 12%. That expansion suggests PC buyers still favor Nvidia's prioritization of power-efficient performance at a higher price over AMD's strategy of selling cheaper but less power-efficient chips.
3. Its gross margins are expanding
Nvidia's dominance of the data center and gaming GPU markets gives it plenty of pricing power. The expansion of its higher-margin software applications, which are bundled with its data center chips, is also boosting its gross margin.
That's why Nvidia's adjusted gross margin of 71.2% in the second quarter marked a big improvement from its gross margin of 66.8% in the first quarter and 45.9% a year ago. It expects that figure to rise between 72% to 73% in the third quarter.
4. It expects its growth to accelerate again
For the third quarter, Nvidia expects its revenue to rise about 170% year over year. That would represent its third consecutive quarter of accelerating growth. It didn't provide a bottom-line forecast, but it will probably grow its adjusted EPS by the high triple digits again. Analysts expect its revenue and adjusted EPS to grow 65% and 147%, respectively, for the full year.
The one reason to sell Nvidia: Its valuation
Nvidia's forward price-to-earnings ratio of 60 might initially seem reasonable relative to its rapid growth. But with an enterprise value of $1.16 trillion, Nvidia still trades at 26 times this year's sales. For reference, AMD and Intel trade at 7 and 3 times this year's sales, respectively.
Therefore, any hint of a bursting "AI bubble," unexpected competitive threats, or a longer-term slowdown could easily cut Nvidia's stock in half. A look back at Zoom and Snowflake's boom-and-bust charts reveals just how quickly the bulls can retreat from a pricey hypergrowth company once its revenue growth cools off.
Is it the right time to buy Nvidia stock?
Nvidia's business is still firing on all cylinders, so it's smarter to be bullish even if its stock is richly valued. Simply put, I think Nvidia is still worth buying -- but investors should be ready for a lot of near-term volatility if the AI market cools off.
